The European Court of Justice has ruled that a clause in a property lease between a mall owner and a supermarket anchor tenant, which gave the tenant the right to approve the granting of leases to competing stores, was not anti-competitive by object.(1)
This means that any investigating authority or court would have to conduct a thorough assessment of the likely effect of that type of clause in actual market conditions before ruling on its legality under EU competition law.
The judgment sets out an established two-stage test for assessing whether clauses like this (akin to exclusivity arrangements) are restrictive:
- Is the market closed off (in this case, to food retailers)? This involves looking at whether there are genuine possibilities for a new competitor to enter the market (taking account of market realities – eg, economic and regulatory barriers); and
- If access to the market is made difficult for new entrants, do the agreements in question add to that closing off to an appreciable extent (eg, given their duration and the market position of the parties)?
The judgment appears to endorse current market practice, where such lease provisions are often necessary to secure an anchor tenant and the financial viability of the development.
It is therefore likely to be welcomed by both shopping centre developers and retailers alike.
This ruling clarifies that restrictions on the ability of a mall owner to grant leases to competitors of the anchor tenant are not automatically illegal.
However, care must be taken, since exclusivity clauses have the potential to restrict competition. If there is a risk that new entrants might find it difficult to enter the market (whether by setting up in a competing mall in the catchment area or in commercial premises outside a mall), then closer examination is necessary to ensure that the clause will be enforceable if challenged. The market strength of each of the companies, the duration of the agreements plus the number of agreements with similar clauses will be important factors in the analysis.
Although this case dealt with restrictions imposed on the lessor (mall operator), there is an argument that the same reasoning should apply to the opposite situation, where the restriction is imposed on the retailer (eg, a radius clause, which prevents the retailer from opening stores within a given radius of a shopping mall).
The treatment of radius clauses in other countries implies some support for this:
- In 2011 the Austrian Supreme Court ruled that clauses in shopping centre leases which prohibited tenants from opening shops in other centres within a certain radius did not infringe competition rules.
- In the UK case of Martin Retail Group Ltd v Crawley Borough Council ( WL 7090797) the court found that a user clause in a lease (preventing the lessee from expanding its offering to sell different goods) was anti-competitive.
However, care should be taken. A recent case in Germany suggested a stricter by object approach to restrictions imposed on retailers. The German competition agency challenged a radius clause imposed by an operator of an outlet centre which prevented retailers from opening another store within a 150 kilometre (km) radius. It concluded that the clause was anti-competitive by object because it exceeded a geographic scope of 50km and lasted for more than five years.
Radius clauses stand a better chance of being upheld where they are tailored to the operator's needs and can be justified. Competition authorities will no doubt be suspicious of radius clauses whose scope is larger than that of the relevant market (eg, the catchment area) in which the company seeking to benefit from the clause is active.
For further information on this topic please contact Samantha Mobley and Grant Murray at Baker & McKenzie by telephone (+32 2 639 36 11) or email ([email protected]or [email protected]). The Baker & McKenzie website can be accessed at www.bakermckenzie.com.
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